National Westminster Bank bounced back yesterday from two years of depressed earnings with an 18 per cent increase in pre-tax profits to £1.14 billion sterling (€1.73 million) in the six months to June 30th.
But the bank's shares slid 41p to end at £12.05 as investors fretted over the continuing rise in its cost base.
NatWest is the latest UK bank to see its share price fall despite reporting better than expected profits in the first half.
With Standard Chartered due to report today and Barclays tomorrow, only Lloyds TSB and HSBC Holdings have so far risen on the strength of their first-half results.
Although comparisons are clou ded by the disposal of several businesses in recent years, NatWest's operating expenses in on-going businesses rose 5 per cent to £2.35 billion.
Mr Derek Wanless, chief executive, said the increase reflected a 38 per cent increase in revenue investment spending to £263 million. This included costs of ensuring computer systems were prepared for the millennium bug, as well as £32 million on e-commerce and payment cards.
"Cost control remains vital. We continue to expect NatWest UK costs, excluding revenue investment and restructuring costs, to be lower in 2000 than in 1997," he said.
NatWest has embarked on a five-year programme aimed at transforming its UK retail bank by transferring operations such as cheque handling from branches into more efficient processing centres.
Analysts accepted that even if its cost base was too high, NatWest had to keep investing in areas such as e-commerce, Internet banking and improved customer service.
"The world is changing. They are going to have to spend quite heavily going forward," said Mr Nick Collier, banking analyst at Morgan Stanley.
NatWest will pay an interim dividend of 13.1p (11.8p) on earnings per share of 45.9p (41.2p). The bank bought back £596 million of its own shares in the first half.
